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Shares in Dividend Aristocrat Rio Tinto (LSE:RIO) have been falling. However a wise acquisition this week has caught my consideration.
The agency has introduced an settlement to purchase Arcadium Lithium – one of many world’s largest lithium mining producers. That’s put it on my checklist of shares to purchase.
Renewable power
Like a whole lot of mining firms, Rio Tinto’s seeking to deal with metals that might be essential for the transition to renewable power. The obvious are copper and lithium.
Rio Tinto does have copper operations. However its output in 2023 was decrease than the likes of Anglo-American, Antofagasta, or Glencore and solely made up 12% of the agency’s total gross sales.
The acquisition of Arcadium Lithium – one of many world’s largest lithium producers – provides one other dimension to the corporate’s portfolio. And it’s arguably coming at an excellent time.
Rio Tinto’s set to pay $5.85 per share – a 90% premium to the worth the inventory was buying and selling at when the deal was agreed. That looks like rather a lot, however buyers ought to look nearer.
A wise acquisition?
Rio Tinto’s CEO Jakob Stausholm mentioned of the settlement:
It is a counter-cyclical growth aligned with our disciplined capital allocation framework, growing our publicity to a high-growth, engaging market on the proper level within the cycle.
In different phrases, it’s seeking to make the most of lithium costs being beneath their pre-pandemic ranges to accumulate a lithium miner whereas its inventory is unusually low-cost.
Lithium Carbonate Worth 2017-24
Supply: Buying and selling Economics
Arcadium was solely shaped initially of 2024, however the inventory started buying and selling at $6.81 per share. Which means Rio Tinto’s deal represents a 15% low cost to the place the inventory was in January.
I believe it’s laborious to not be impressed with the transfer from the FTSE 100 miner, which is paying money for the transaction. In a cyclical trade, it’s very a lot the definition of shopping for low.
Dangers and alternatives
Precisely how properly the deal works out over the long run will depend upon the worth of lithium. And whereas there are causes for optimism, it’s additionally value noting why this collapsed these days.
One purpose is that electrical automobiles (EVs) have been slower to take market share than anticipated. That is partly to do with issues about vary and the dearth of charging infrastructure.
One other subject is oversupply from China. Earlier this week, US officers reported issues that it is a transfer to try to pressure the worth down within the quick time period to eradicate rivals.
Each of those are challenges for lithium producers. However I believe with the worth Rio Tinto has paid for the acquisition, the chances are in its favour over the long run.
Dividend revenue
Rio Tinto has a superb report of accelerating its shareholder distributions over time and I count on this to proceed. And the dividend yield‘s presently a gorgeous 6.75%.
There are by no means any ensures in terms of dividends. And buyers ought to word that 60% of its revenues presently come from China, the place industrial output appears to be like weak.
Nonetheless, with the share value at £50.15, I believe there could possibly be a possibility right here. If I had £1,000 to take a position proper now, 19 shares in Rio Tinto can be my selection.
